The Japan-China economic relationship: distance, institutions and politics

Abstract

This study of the trade and investment relationship between Japan and China asks what drives it and whether the vagaries of their political relationship have affected these elements of their economic relationship. Tools are developed to account for the determinants of trade and investment flows and to measure resistances to trade and investment. This allows benchmarking and cross country comparisons of trade and investment performance. A world trade frontier and an FDI frontier are estimated using an approach that incorporates a consistent framework for isolating core determinants and resistances. The results suggest that the proximity of Japan and China, their complementary economic structures and the multilateral settings in which both are deeply integrated have been more powerful drivers of trade than the ups and downs of politics. While the economic relationship is not independent from the politics it has not been diminished or disturbed by politics to a significant extent. The analysis is complemented by examination of the electronics and automobile sectors, investigation of the dynamics of the link between politics and trade, and discussion of the role of the WTO. China's commitment to the global trading system from the mid 1980s and its accession to the WTO in 200 I have meant that tensions from time to time in the political relationship have not derailed, but have increasingly come to be dominated by, the economic relationship.